Visa and MasterCard are adopting emerging communications technology called host card emulation (HCE), which is designed to power bank and merchant-led mobile payments apps with less reliance on phone hardware.

HCE allows mobile apps to bypass the phone's secure element to make Near Field Communication (NFC) payments. It also leaves payment credentials off the handset, potentially overcoming many of the barriers and concerns of mobile carriers.

"It's a simpler, less complex and less costly method in general for financial institutions to use to set up their mobile payment infrastructure," says Brad Greene, vice president of digital solutions in developed markets for Visa, who adds the card network will still support hardware-based mobile payments technology.

Visa is leveraging HCE to support Visa payWave contactless payments from smartphones.  There are several Visa issuers that are in pilot with HCE, though Visa did not disclose their names. The technology is also being positioned for merchants, Greene says.

Prior to the introduction of HCE, mobile wallets that rely on NFC for contactless payments had to get mobile carriers' approval before being granted access to the phone's secure element. This was most famously an issue for Google Wallet, which faced resistance from Verizon and other networks until Google adopted HCE in the latest version of its Android mobile operating system.

Separately, MasterCard plans to publish an HCE specification it developed over the past year with Capital One and Banco Sabadell.

"This technology approach is really to enable issuers to launch payment programs and we think [HCE] will allow them to launch faster and quicker and get to market easier," says James Anderson, group head of emerging payments at MasterCard, which is expected to publish its specification sometime during the first half of 2014. "[HCE] is an approach that will enable scaling and widespread adoption."

The announcements by Visa and MasterCard have sizable implications in that they give credibility to HCE and provide a framework for added payments technology development, says Jordan McKee, an analyst at Yankee Group.

"With NFC penetration in smartphones and point of sale terminals continuing to increase, these announcements are very timely," he says, adding the card network's moves will encourage the development of more issuer and merchant-led wallets with NFC.

Other companies are also using HCE, thanks in part to Google' s addition of the technology in version 4.4 of its Android mobile operating system, nicknamed KitKat. And Bankinter said this week it would use HCE to design a mobile wallet for the Spanish market.

"HCE certainly has the potential to breathe life into contactless/ NFC payments," says Zil Bareisis, a senior analyst at Celent. "The only word of caution is that it is still only available on Android, so iOS devices still remain outside the scope for now."

Apple did not return a request for comment by deadline. Apple has never included NFC tech in its iPhone handsets, but the company supports an alternative wireless technology, Bluetooth Low Energy, in its iBeacons. Greene would not say if Visa is lobbying Apple to support NFC or HCE.

"What we've done is signal Visa's support for this technology as an additional deployment option," Greene says. "What other companies choose to do is their choice. We are gratified that Android, which has tremendous market share, has HCE capabilities."

MasterCard's Anderson says he hopes Apple will adopt a similar technology. "I don't think that consumers who use Apple devices or Android devices see the use of their devices in a different way," Anderson says. "We would live to see [Apple] develop something similar, but Apple keeps their product plans pretty close to the vest."

HCE also gives banks and card companies a contactless payment option that doesn't rely on mobile carriers and manufactures, says Gareth Lodge, a senior analyst at Celent.

"It feels as though the balance of power has tipped back slightly towards the banks, as they still own the funding mechanism," Lodge says.

In Europe, however, that power may be fleeting, Lodge says. Pending regulations under the Payment Services Directive will require banks to provide access to account-level information to third parties. "While likely a few years off, that potentially has wide-ranging implications," he says. 

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